The world's biggest sovereign wealth fund is about to start taking more risks

Norway's Global Government Pension Fund, the biggest sovereign
wealth fund in the world by assets under management, could be
about to start taking a lot more risks if it follows the advice
of a government-commissioned report into the way it allocates its
assets.

The new report, released on Tuesday, argues that the £716
billion ($880 billion) fund should increase its holdings of
shares, and move around £71 billion ($87 billion) of its assets
into riskier equity holdings.

This would mean that roughly 70% of the fund's assets are
held in stocks, up from just less
than 60% right now.As a result, the fund's
government bond portfolio would shrink
substantially.

"A higher share of equities increases the expected return,
and the contribution to the fiscal budget, but also entails more
volatility in the value of the Fund and a higher risk of a
decline in its long-run value," the report noted.

"The majority is of the view that this risk is acceptable,
provided that there is political will and ability to adapt
economic policy to the accompanying increase in risk, in both the
short and long run."

Previously, the fund held around 40% in equities before
increasing its allocation to 60% in 2007, just before the global
financial crisis hit.

Norway's sovereign wealth fund is looking for new ways to
make money given the rock-bottom yields most developed-market
government debt has right now, and following the crash in oil
that has seen prices for the world's most important commodity
crash from more than $100 per barrel to just more than $50 now,
having briefly dropped below $30 early in the year.

Rock-bottom global bond yields are making things even more
tricky, as interest rates close to zero all around the world
continue to bite. The eurozone, Switzerland, Sweden, Denmark, and
Japan all already have negative interest rates, and rates in most
other developed markets are pretty close to zero. In the UK, the
rate is 0.25%, while in the USA it is 0.5%.

Low interest rates mean low yields on bonds, meaning that
the fixed-income market is not one where there is much money to
be made right now, and that has helped drive the recommendation
to move more money into stocks.

"With a higher share of equities the expected return will
increase as will the income to the government budget. Yes, it
comes with higher risk but we think we are well equipped to
handle this risk," Hilde Bjornland, an economist who was part of
the team that compiled the report,
told the Financial Times.